SEC Chairman Mary Schapiro said Thursday that legislation introduced by Republicans to restructure the agency and its rulemaking process would threaten the agency’s ability to write and enforce rules effectively. She also said that the SEC is already working on some reforms recommended by the Boston Consulting Group in the report it issued in March. Schapiro made the remarks in written and spoken testimony during a hearing in the House Financial Services committee on SEC reform.
House Financial Services Chairman Spencer Bacchus recently introduced draft legislation called the “SEC Modernization Act” that would consolidate a number of SEC divisions and offices and amend ethics guidelines. In opening statements, Bacchus acknowledged that it might also be appropriate for the SEC to reform itself and that he personally believes that any reform effort would require additional funding.
"There are probably two basic paths we can take. One would be for the SEC to reform itself. Physician, heal thyself," said Bacchus. "And I think that’s a rational appropriate approach. Another approach would be for legislation. A lot of Republicans and Democrats have said that before the SEC obtains additional funding there needs to be reform. On the other hand, some of my colleagues have argued with some persuasion that with their expanded role there is a need for an immediate funding increase. My personal view is that an increase in funding is probably needed as part of the reform process."
Also under discussion was legislation introduced by Capital Markets Subcommittee Chairman Scott Garrett Garrett called H.R. 2308, the “SEC Regulatory Accountability Act” that would require the regulator to conduct cost-benefit analysis before writing rules or issuing orders.
Schapiro said she worries that codifying agency structure in legislation under the Bacchus bill would not allow the SEC the flexibility it might need to respond to changes in the markets. The second bill, she said, is both redundant and may conflict with the SEC’s stated mission. In addition, the legislation adds so many new layers of analysis that it sets the agency up to fail, she said in response to questions during the hearing.
“As you know, statutory requirements already explicitly require the Commission to consider the economic effects of its rules, and the economic and cost-benefit analyses are fundamental components of the Commission’s rulemaking process and an essential part of our work,” she wrote in her written statement.
In addition, some of the factors the bill directs the SEC to consider in its economic analysis are “potentially in conflict with the SEC’s mission, duplicative of existing requirements, unrelated to SEC rulemaking, or unclear in scope.” She adds, “For example, the bill’s direction to ‘asses the best ways of protecting market participants,’ could conflict with the SEC’s mission. The SEC’s mission is to protect investors, which in some cases means protecting them from certain market participants.”
Also, requiring cost-benefit analyses of all orders, “could undermine our ability to issue enforcement orders against wrongdoers, delay exemptive orders needed to facilitate the introduction of new investment products to the market, and impede the capital formation process by delaying orders to registrants that accelerate the registration of their securities,” she wrote.
The Financial Services Institute, a lobbying group for the independent broker/dealer industry, issued a statement supporting Garrett’s bill Thursday. Cost-benefit analysis “Will strengthen the SEC rule making process which has been subject to several successful court challenges in recent years,” wrote FSI President & CEO Dale Brown.
